By Sanjay Tolani
COVID-19 will go down in history as a unique crisis due to its impact on everyday life.
From closed businesses, stock market crashes and income reductions (including an absolute stop of income for some), cash flow is being affected in ways unlike previous recessions. This makes the pandemic a real test of forced retirement.
While advisors are focused on helping clients weather this crisis, COVID-19 has reminded us that we do not always get to choose our retirement dates. Therefore, the best way to prepare clients for the next crisis is to plan as if that crisis may end their working lives.
After previously presenting the need to build an income stream in case of forced retirement from illness, advisors now have to add economic reasons for forced retirement into concept presentations with clients.
Assets vs. Income
Financial planning as a profession overuses the term “assets” in retirement planning. When the term is used so frequently, clients receive the message that they need to build asset pools, whereas what they really need to do is secure future income.
Ideally, these go hand in hand, but the current crisis has clearly shown us how quickly income can disappear and how some assets that don’t provide income can become financial drains and turn into liabilities.
Advisors must clearly communicate that, while theory suggests that asset accumulation and preservation is the strategy for building wealth, it is truly income accumulation and income preservation which secures a future where clients can reliably meet their needs.
Traditional portfolios of equities and bonds work well to build assets over the long-term, but it takes a while before they can produce sustainable income at any given time. For clients who want to maintain a portfolio after the crisis, encourage them to look beyond equities and bonds to cover all the five primary types of investments.
Each of the following has its strengths and weaknesses, so a proper balance will be more important than ever:
● Property comes with security but also high illiquidity. In good times, property supplies steady rental income, but in bad times it can become a financial weight for clients to drag around.
● Equities have high potential, especially over the long-term, but come with extreme latent volatility even under good economic conditions.
● Bonds offer secure financial investments but require time to mature. They also have specific tax liabilities in certain legal jurisdictions.
● Commodities bring the security of physical existence but are extremely volatile and vulnerable to political interventions. They are best when clients won’t need their money anytime soon.
● Cash equivalents are secure and liquid but come with nominal rates of return.
Unfortunately, we are seeing many examples of the risk of overweighting portfolios with one or more of the above categories. Equity losses and plunging bond yields dominated headlines in March 2020 when global credit markets came under strain, and oil prices fell into negative territory for the first time ever.
Investors dependent on property have also suffered some of the worst losses, from restaurant owners dependent on business revenue to hosts on platforms like AirBnB.
As clients look for ways to reduce their risk of income loss, annuities are currently the most ideal option.
Insurance contracts help protect our income against risks from sickness, untimely death, disability and property loss. Annuities extend an income promise to clients who no longer wish to spend time or emotional energy managing standard portfolios.
Advisors should discuss annuities and the idea of guaranteed income with each client once the immediate financial risks have been addressed. Not all conversations will lead to purchases, and not all clients will be suited for them. But the discussion will communicate the idea and can lead into restructuring long-term investments to reduce short-term risks.
Planning For Present And Future
Conversations about the future must be held now, alongside helping clients apply for government aid, stick through the ups and downs of the market and ensure bills get paid.
Advisors may have more of an opening on this than they think. I am spending more time talking to clients because some are isolating alone and just need somebody to talk to. While it may be tempting to spend all that time navigating this open-ended pandemic, planning for the future must happen now precisely because COVID-19 has no clear end date.
The next crisis could come at any time, so preparations cannot wait for the end of the crisis today.
While the pandemic correctly instills fear, a silver lining is that it can deliver a once-in-a-lifetime chance at needed financial overhauls. Advisors must stand ready to help professionally and emotionally to comfort clients as they navigate through this historic event.
Forced retirement is a reality of today, and advisors must encourage clients to review their own retirement strategies and protection strategies. For clients in their 30’s-40’s it’s a wakeup call, for clients in their 50’s-60’s it’s a reality check. So call your clients today and help them re-plan, and re-strategize their future.
About The Author
Dr. Sanjay Tolani (PhD) is an 18-year member of MDRT with 2 Court of the Table and 14 Top of the Table Qualifications. He is currently the CEO of Goodwill World (A Multi Family Office) and works in both insurance and financial planning for Ultra High Net Worth Families in over 53 countries. Dr. Tolani became the youngest member of MDRT at the age of 19 and the youngest life member at age 28. He has authored ten books on financial advising, and the proceeds of four of Dr. Tolani's books benefit the MDRT Foundation. Dr. Tolani lives in Dubai, United Arab Emirates.